Friday, February 5, 2016

Relationships as Emotional & Intellectual Diversification

In a recent post, I discussed some strategies for dealing
with volatility in financial markets. I was reading a blog post by Robin Rifkin
this week, and realized that I’d focused exclusively on what one could do at
the individual level. Reading Rifkin, it became clear that a strategy I’d
missed was to surround oneself with people who were able to be calm in the face
of market vicissitudes. Finding a community of thoughtful investors should
certainly be a priority – and this includes both the living and the “eminent
dead”, as Charlie Munger calls them.

I almost wrote about finding a community of “like-minded
investors”, though, and that struck me as a dangerous turn of phrase. I’ve
written before about the risks of dogmatism and herding. In some ways,
portfolio theory offers a useful analogy. A portfolio is improved by including
assets that are uncorrelated. Similarly, one’s emotional and intellectual life
is improved by diversity (within reason, of course. In a portfolio, you don’t
want lack of correlation for its own sake – naturally, you want assets with
positive future returns. In life, people who offer emotional and intellectual
diversity may have other flaws that make it less worthwhile to associate with
them. And of course the analogy has its limits. In portfolio theory, the Holy
Grail is finding negatively correlated assets. If I had a friend who was
delirious happy when I was very sad, I’d find that either rude or downright
bizarre!)

So, to summarize: Rifkin is 100% correct that the right
commentators and investors can provide a steadying hand during uncertain times,
and he seems to have assembled a diverse group to lean on. The latter point is essential,
and perhaps under-appreciated, in a world where we need relationships for emotional
and intellectual diversification.